BoE decision makers increasingly split on rate rise issue

The split among Bank of England policy makers widened this month as two officials joined Kristin Forbes in her call for a rate increase, warning that inflation could rise more than previously thought.

In the biggest division on interest rates in six years, the Monetary Policy Committee voted by five members to three to maintain the key interest rate at a record-low 0.25 per cent. Michael Saunders and Ian McCafferty broke ranks to demand an immediate hike to 0.5 per cent.

The pound jumped after the decision and was up 0.24 per cent at $1.2781. Bonds fell, with the 10-year gilt yield rising 9 basis points to 1.01 per cent.

The shift comes against an uncertain backdrop for the UK, with real earnings falling, consumer spending weakening and prime minister Theresa May unexpectedly losing her parliamentary majority after calling a snap election.

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At the same time, recent data have shown inflation accelerating faster than the central bank projected just last month, with the rate now at 2.9 per cent.

Citing the pound’s recent decline, the BOE said inflation could overshoot the 2 per cent target by more than previously thought. The three hawks also said that slack in the labor market appeared to have diminished.

For the majority, reasons for keeping policy unchanged included slowing consumer spending and economic growth. “It was too early with confidence how large and persistent” that slowdown would be, the MPC said in a statement alongside the policy announcement.

The BOE decision came hours after the Federal Reserve raised interest rates for a second time this year and chair Janet Yellen indicated she's pressing on with normalising monetary policy.

It suggests the BOE may be beginning to edge in that direction, though Brexit and the cooling economy mean that its progress is likely to be cautious. The MPC said any rate increases will be at a “gradual pace and to limited extent.”

The BOE's comments are the first in more than month from policy makers, who were in a quiet period during the election campaign. Governor Mark Carney will speak later at the annual high-profile Mansion House event in London's financial district.

The outcome of the UK vote complicates the prospects for Brexit talks. When the BOE updated its economic forecasts last month, it assumed that Britain's adjustment to a new relationship with the European Union will be "smooth" -- avoiding a so-called cliff edge.

Chancellor of the exchequer Philip Hammond will also speak at Mansion House, where he's expected to make the case for a new path for Brexit that focuses on protecting jobs and economic growth.

Bloomberg